2009 Top 5 Dividend Stocks-part 2 - Protecting Your Yields

2009 Top 5 Dividend Stocks-part 2 - Protecting Your Yields

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In part 1 of this article, we identified 2009's top 5 dividend stocks, based upon cash payouts to investors. We also asked, "What if you want the yield income from some of these stocks, but you're afraid of a market pullback, or, you think the prices are too high?

1. Royal Dutch Shell (RDS-A, RDS-B) is paying $3.20/share, and currently yields 6.5%.

2. AT&T (T) - Pays $1.64/share, currently yielding 6.4%.

3. General Electric (GE) GE's $.82/share 2009 payout currently equals a 6.1% yield. (The payout will decrease to $.10/share per quarter in the 3rd and 4th quarters of 2009, so the remaining payout/share for the balance of 2009 will be $.51, a yield of 3.8%, or 5.7% annualized).

4. Exxon Mobil (XOM) The annual dividend rate for Exxon is $1.60/ share, for a 2.46% current yield.

5. Chevron Corp. (CVX), has an annual dividend/share of $2.60, equivalent to a dividend yield of 3.8% at the current price.

There are 2 ways you can protect yourself from a falling market and still earn the dividend income these stocks. In fact, this strategy will multiply the yields several times over:

Strategy 1: Sell covered calls: You could buy the stock at its current price, and then immediately sell a call against it. In which month and at which strike price should you sell? When you analyze which month's call option to sell, remember that, normally, the further out in time you sell, the higher call premium you'll receive. Typically, many income investors will sell "LEAP" calls, which are in January of the following year or even the year after, if they want to hold the stock for a long time.

Important Note: A Call contract is tied to 100 shares of the underlying stock, so you'll need to own 100 shares for every call contract you sell.

Take GE as an example:

1. You'd have to buy a minimum of 100 shares. The current price is $13.30.

2. Sell the Jan 2010 $15 call contract, currently worth $1.40.

3. Collect the $.51/share in dividend payments from June-Dec 2009

4. If GE goes past or to $16.40, ($15 call strike price plus $1.40 call premium), at or near expiration, your shares will be assigned or called away, (sold), at $15.00, (the call strike price), for an additional $1.70/share in income.

OR

If GE doesn't rise past or to the $16.40 at expiration in January,2010, you'll keep your shares, and you could repeat this strategy again.

You'll have a lower non-tax cost basis, due to the dividend and call income you received.

Your adjusted cost basis, or breakeven, is $11.39, ($13.30 less $1.40/share call income and $.51/share dividend income).

The nominal yields on the first two parts of this 8-month-plus trade are:

1. Call Yield: $1.40/share 10.53%

2. Dividend Yield:$ .51/share 3.83%

This 14.36% 8-month yield is equal to a 21% annualized yield. This 21% yield is also your downside protection in this trade.

The potential additional $1.70/share gain, if GE rises past $16.40, equals an 8-month+ gain of 12.78%, or 18.74% annualized.

To summarize:

Your initial yield and downside protection is 21%.

Your total potential return is 39.74%, (21% + 18.74% assigned capital gain on sale of shares).

The trade range is:

Breakeven: $11.39 Assigned Price Trigger: $16.40.

In part 3 of this series, we'll discuss a strategy that allows you to pay less than the current market value of a stock, should you feel that the current price is too high.

About the Author:
Robert Hauver, MBA, publishes The Double Dividend Stock Alert a monthly investment newsletter with high yield, low risk strategies for income and value investors. For high yield strategies on great stocks like the ones in this article, visit: www.DoubleDividendStocks.com



Article Originally Published On: http://www.articlesnatch.com


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